ATT braces for more hangups

By Scott Moritz, writer

The pinch on consumer spending continues to cause big hangups at phone companies where their core businesses — landline telephone service — is eroding faster than ever.

The latest round in the alarming decline in phone lines will come Tuesday morning, when AT&T (T) presents its first-quarter earnings. Analysts are expecting AT&T — No.10 on the Fortune 500 list — to report that the rate of line losses in Q1 exceeded the 8% hit it took last year. No. 2 telco Verizon (VZ) has an even higher cancellation rate, losing 8.1% of its lines last year compared with a 7.6% decline in 2006.

The news signals an acceleration of a troubling trend for the sector as consumers, already hit by higher gas and grocery prices, look to their phone bills as a place to trim expenses. AT&T was the first telco to ring the warning bell when it said in January that there was “softness” in some regions of the consumer market.

This sluggish economic backdrop has made a tough competitive market even tougher, as cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC) grab market share with their triple play offerings — video, Net and phone services.

If there’s one area that may help offset the landline defections, it’s wireless. But even AT&T’s high-revving mobile unit — the Apple (AAPL) iPhone’s only U.S. carrier –  is feeling the slowdown as the market becomes saturated. AT&T is expected to have added about 2 million net new mobile phone customers in the first quarter, a number that is down seasonally from the 2.7 million user it picked up in the busy holiday quarter that ended in December. Verizon Wireless — a joint venture of Verizon and Vodafone (VOD) — is expected to post a retail post-paid net subscriber gain of 1.5 million, down from 1.9 million in the fourth quarter. Verizon is scheduled to post earnings next Monday.

No.3 wireless player Sprint (S) has already indicated that it may lose as many as 1.2 million subscribers in the first quarter as users continue to flee its ailing service in mass.

AT&T’s so-called landline business accounts for about 59% of total revenue and about 55% of its profits. With the number of lines falling, AT&T has had to trim costs to keep in pace. Last week AT&T said it was cutting about 4,650 employees, or 1.5% of its staff in a “streamlining” effort.

Analysts expect AT&T on Tuesday to post a pro forma profit of 74 cents a share, up from 65 cents in the year-ago quarter. Sales for the first quarter are expected to be $30.7 billion, an increase over the $29 billion a year ago.